Cash-strapped Ireland tests limits of austerity

Butcher Sean Smith, 43, chats with one of his regular customers in his shop in Dublin on Thursday, Jan. 19, 2012. Smith says Ireland feels like it's ``under German rule'' ever since it took an EU-led bailout that requires severe budget cuts and tax hikes. Terms of Ireland's international bailout mean at least three more years of deepening austerity.

DUBLIN — Ireland is testing the limits for how much European Union-ordered austerity one country can take. Its four-year struggle to save its banks and tame a runaway deficit has already meant slashing thousands from the annual budgets of most households — and many Irish say they're close to breaking point.

"We're squeezed to the pips," said Tommy Larkin, a 35-year-old mechanic changing tires and oil on the double in northside Dublin. "I never had to watch my money in the good times, but that's all I do with my money now."

Across the road, butcher Sean Smith, 43, isn't quite as forlorn about his own family finances but is just as bleak about Ireland's financial future.

"We're under German rule, it's as simple as that, and we'll be paying them back forever," Smith said, referring to Ireland's loss of economic sovereignty since taking a bailout from the EU and International Monetary Fund 14 months ago.

On Thursday, EU and IMF chiefs monitoring Ireland's handling of its debt crisis left Dublin singing the praises of a government that has slashed its 2011 deficit to below 10 percent of GDP, ahead of the bailout plan's target.

Ireland has been cutting its budgets and raising a slew of taxes since January 2009 and, according to the EU-IMF bailout plan, still must cut billions more over the next three years just to regain a 2015 deficit of 3 percent of GDP, the maximum level permitted in the eurozone.

Middle-class wages have been cut around 15 percent, while the nearly 15 percent unemployed have seen welfare and other aid payments trimmed. The government has just raised sales tax to 23 percent, joint highest in the EU, imposing a new household tax, and planning new water charges next. Keeping a car on the road can mean an annual fee of anything from €160 ($205) to €2,258 ($3,045), while recent fuel-tax hikes have helped take gas above €1.50 per liter ($7.25 per U.S. gallon).

Many economists believe Ireland is trying to defy economic gravity by fighting a war on its own debt that, to succeed, will require strong economic growth alongside spending cuts. Austerity alone, the recipe so far, undercuts the hopes of growth by sucking money out of the economy.

The same formula of reforms centered on austerity is being applied across Europe and is championed by Germany's chancellor and leading voice in Europe's financial planning, Angela Merkel, as a way out of the region's financial crisis. Recession-hit Greece and Portugal, which have also been the recipients of bailouts, face severe austerity measures.

The proponents of austerity have pointed to Ireland as proof that it can work, but questions are growing over how much longer the country can keep squeezing money from its economy.

"If austerity don't work in Ireland, it won't work anywhere. And it can't work here if people are scared stiff of spending whatever money they have," said David McWilliams, Ireland's most prominent economic commentator, who foresaw the demise of the 1994-2007 Celtic Tiger economy as credit and property bubbles collapsed.

McWilliams noted that Ireland has an extremely flexible labor market by European standards, is quick to use its traditional safety valve of emigration to keep unemployment artificially low, and has built a lopsided economy dependent on the fortunes of nearly 1,000 foreign multinationals based here.

Despite these advantages, he said, Ireland still stands little chance of achieving the economic growth it needs so long as it's trapped in an EU-directed plan that takes progressively more money out of people's pockets.

"Search every economic textbook you've ever read and find the one that says cutting expenditure in the teeth of a recession will make the economy grow. It doesn't exist," McWilliams said.

"The problem with our austerity budgets is that we're trying to hit a moving target, and every cut and tax hike moves the target further away. I don't see how these austerity budgets ever end," he said.

Ireland's most recent consumer confidence survey last month recorded a precipitous drop as citizens reflected worries about their declining net pay and job security, mortgages in negative equity, and tougher times expected to come.

Austin Hughes, chief economist at KBC Ireland, a Belgian-owned bank that is one of Ireland's main mortgage providers, said the country faces a make-or-break 2012. If the economy doesn't grow sufficiently, he said, people will increasingly reject the whole rationale of austerity.

"Ireland started battling its downturn in 2008 before virtually the rest of the world. As we face into 2012, we're battling this sense of dread, that this fight against debt could go on forever. The risk is it's going to tax people's willingness to make further adjustments," said Hughes, who co-authored the consumer confidence report.

"People rightfully wonder: How bad will property taxes get? How much higher will the other charges go? How bad will the cuts in public services be? We've been living with too much certainty for too long," he said.

"With each austerity budget the government extends this sense of hope that we're coming to the corner, that the worst is over and things are about to get better. And at each stage that hope gets snatched away."

Ireland's exceptional exposure to the economic fortunes of its two major trading partners, the U.S. and the United Kingdom, appears to be the key to pulling Ireland out of its doldrums — or its Achilles heel, if those two economies don't generate their own growth.

Multinationals in Ireland, chiefly American companies attracted by an unusually low 12.5 percent rate of corporate tax, generate more than 18 percent of Ireland's entire GDP.

The trouble is, those companies making goods for sale overseas provide just 7 percent of Ireland's jobs, according to estimates by McWilliams. So even as these companies' exports boost GDP, their actual economic footprint on the ground in Ireland is far less.

"When Ireland's GDP rises, it doesn't mean anything to the real people of Ireland. It means Pfizer pumped out more Viagra last month," McWilliams said, referring to one of Ireland's most high-profile U.S. drug companies and exports. "And frankly, the level of erectile dysfunction in North America is hardly a firm basis for growth in Ireland."

Perhaps the most striking aspect of Ireland's economic fall has been the relatively low levels of public protest.

Commentators credit Ireland's post-Famine experience of poverty and emigration, its tradition of close government-labor union relations, and its exceptionally high levels of property ownership as disparate reasons why the country's shrinking work force keeps reporting to their jobs.

Smith, the Dublin butcher, and Larkin the mechanic are both bracing in their own ways for a tougher 2012. Both imagine an alternative Ireland where enraged workers riot in the streets, but both doubt it will happen.

Larkin is living paycheck to paycheck with nothing left over for savings. His partner takes care of their 3-year-old child at home, and another baby's on the way in March. The home they bought in 2006 with a €270,000 ($350,000) mortgage is worth less than half of that now.

The auto shop has had to lower prices to keep penny-pinching customers coming in. Its newest competition includes shops that sell imported, used German tires — too worn down for German roads, but still legal in Ireland — for half the price of new ones.

One of his friends has just given up on Ireland and joined the 1,700 on average who leave the country each week. Part of him would love to join his friend overseas.

"If I had nothing tying me down, no mortgage, I'd be on that plane to Australia as well," Larkin said.